Friday, December 14, 2007

Peak Oil Passnotes: On the Cusp

Whether the peak is at the current figure of 85 million barrels per day or can sneak up to 95 million barrels per day over the next decade is neither here nor there. In historical terms we are on the cusp. What is slightly worrying at the moment is how that cusp is taking shape.

In normal times a recession dampens oil demand. But at the moment we see many people in financial difficulty, we see a credit crisis, and we also see doggedly high inflation. But instead of weakening oil prices those prices have stayed firm. After oil breached $99 per barrel in the last month, it fell back to $86 per barrel, and many like us thought it would drop further due to impending signs of economic weakness. It did not.

In plain speaking, this is getting worrying. A recession is bad enough, but a recession with high inflation starts to create stagflation. If oil stays at, or around, the prices it achieved in 2007 then we could be in for some serious troubles. Remember that oil prices do not knock through into economies straight away, the impact is delayed, maybe as much as 18 months in some cases. For example in the European Union food prices have boosted inflation to 4.1% - those food prices have been boosted by energy, by oil.

As an example, the credit crisis has not suddenly exploded over one night, one speech or one erroneous political statement. There was no single factor that blasted it into the public consciousness. Instead we had the slow drip effect. Some people had been warning for years that printing extra money to stave off recession - by creating false liquidity - was merely postponing the hurt. It may even end up making that hurt worse.."